Can a fall in the pound help the economy recover

One possible economic way out of our current dilema is to allow the pound to fall and as Chris Dillow reports,this is being considered by a future Tory government.

He quotes from Giles Wilkes' papers slash and burn in which the author says that

George Osborne’s determination to cut the deficit at all costs risks leaving the economy sluggish and the government still mired in debt, according to a new report from liberal think tank CentreForum.

adding that

Even with a monumental collapse in the pound, there is little reason to believe that Britain’s export sector could respond fast enough to drive economic growth. Instead, this policy may just as easily weaken confidence and drive interest rates up, which would wreck a fragile recovery

So according to Chris

Imagine it's 2010-11, and Osborne announces big spending cuts. The Bank of England responds by keeping interest rates low. However, the Fed and ECB start to raise rates. The UK could soon end up with almost the lowest rates in the world. Carry traders around the world will then short sterling. The pound will fall, possibly very sharply. This effect would almost certainly swamp any uplift the pound gets from improved confidence about the public finances.

Mandelson harks back to the macro management days

Peter Mandelson's interview in this morning's FT throws up the fact that the business secretary is impressed with the French industrial policy.

Talking to Peggy Hollinger after meeting business leaders in Paris he says that

“We have something to learn from continental practice without falling into the pitfalls of second-guessing business,”

adding that France

was better at “setting strategic goals and objectives”, as it had done in the energy sector by promoting nuclear power, in transport by creating the infrastructure for high-speed trains and in the aerospace industry.

This is bound to open up the debate that Mandelson will try to revert to a policy of greater state intervention in the economy,maybe even along the lines of macro management.

A clever move by Cameron-admits mistakes on economic thinking

David Cameron has admitted that the Tories got it wrong on the economy and has made a clever move.

Speaking to the CBI in Birmingham the Tory leader said

our banking system is not separate from our economy, it is a reflection of it. The unsustainable debts in our banks are a reflection of unsustainable debts in our households, our companies and our government. But if I’m honest, I have to admit that we – the Conservative Party – didn’t see this as early as we could have.

adding that

there are other areas of economic policy where I look back now and think we would have done it differently if we had the time again. For example, while we warned that it was wrong and complacent to claim that boom and bust had been abolished… we based our plans on the hope that economic growth would continue.

The clever move is to hint at some culpability and thus distinguishing himself and his party from Gordon Brown who is still adament that the causes came from abroad.

It differentiates the party from what has gone before and it means that new policy can reflect on the old mistakes.

Perhaps Gordon Brown should take note

Is this going to be the forthcoming economic battle

Across cities, there is a strong connection between an abundance of small firms and local growth. The last thing that the government should be doing is propping up big declining firms. Real innovations are far more likely to come from someone’s garage, which is where Chester Carlson came up with the Xerox machine during the Great Depression.

So writes Edward Glaeser,economics professor at Harvard.

He is refering to Barack Obama's economic stimulus plan and in particular the rescue packages for the car industry.

Ht-Andrew Sullivan

The end of a 30 year cycle

Greg Dyke was on the sofa on Andrew Marr's show this morning reviewing the papers.

He made a good point during the discussion saying that when the history books are written,2009 will be seen as the end of the market capitalism that began in 1979 and the beginning of a new era of state intervention.

1979 was of cause marked by the start of Thatcherism and a year later saw the birth of Reaganism across the Atlantic.

Both left their mark on the world and successive governments no matter which side of the political lines continued that free market course.

Whether free market capitalism will be seen as the economic system that brought down 150 years of industrialisation and growth remains to be seen.

Many see Mrs Thatcher as the instigator of this brand of economic management as a result of the failure of the post war consensus but was she responsible for all that followed?

Writing in the Independent this morning,Alan Watkins certainly thinks so.

The Iron Lady launched an era of selfishness, greed and fraud which her successors have fostered with care

Don't increase lending,increase the money supply

Tim Congleton writing in this morning's FT has an alternative solution to end the recession.

is an increase in their bank debt necessarily helpful for companies that are short of cash? Surely extra debt is not the answer if companies have already borrowed too much, asset prices are plunging and banks are worried about inadequate collateral for their loans. Would it not be much better if the level of bank deposits, the quantity of money, increased?

Tim has published a pamphlet for the Centre for the Study of Financial Innovation in which he proposes that

private sector spending is heavily influenced by the state of company balance sheets. In particular, the ratio of company bank deposits to their bank borrowings, which might be called “the corporate liquidity ratio”,

Thus he argues that the more bank debt that companies have, the lower is the corporate liquidity ratio and the weaker is spending in the economy. and the solution to the economic crisis is therefore not more bank lending but to increase the amount of money in the economy.

This is of course contrary to what the government is proposing and Tim's appraoch would be

for the government to borrow from the banks, and then to use the loan proceeds either to finance the budget deficit or again to buy assets from non-banks

The next idea-return to the gold standard

Here is an interesting idea courtesy of Alex Singelton wiriting on three line whip.

What we need to do is return to the gold standard.Now many will not know what the gold standard is but is was a time when the value of circulated currency was backed up physically by its weight oin gold in the Bank of England's vaults

When we abandoned it according to Alex

The result was disastrous for price stability and, more recently, our unbacked currency enabled Gordon Brown to create a massive credit bubble and all the resulting economic pain.

So

Returning to the gold standard would not just curb bubbles: it would also protect savers by making inflation minimal

and

the gold standard would encourage long-term investment in the economy.

What are we saving then?

This is an argument that we need to see more of.

Over at Labourhome Red Rooster asks exactly what is the government trying to save from the pre credit crunch economy arguing

The Credit Crunch gave us an immediate purpose, but before that we were floundering for a solid narrative of how we wanted to change Britain for the next 10 years. The Crunch doesn’t postpone that conversation- in fact it makes it all the more urgent. Because at the moment, with the power to reshape the world at our fingertips, I think we fundamentally come across as someone stumbling around a ship in a storm, trying to keep one expensive vase after another from falling and smashing onto the floor. That may be fine while there’s a storm and you’ve invested heavily in vases.

The argument should be taken further.Was an economy based on growth and borrowing the right direction or do the events of the last few months mean that it is time for change?

Time for new beginning according to Cruddas

It is the tax payer who has stood between capitalism and its self-inflicted collapse. With credit frozen and the banks unwilling to lend, the government is being pushed toward the role of sole lender. Capitalism has been rescued by people's taxes and it will be dependent on them for its survival. It's time for capitalism to be made accountable to democracy, and it's time for democracy to renew itself and make itself fit for the challenge.

The words of John Cruddas writing in the Guardian this morning but it is more about the future and when we statrt to come out of the downturn it will not be business as usual.Instead he writes

We must tackle the recession by laying the foundations for ecologically sustainable and equitable economic development. It will mean creating a
democratic and responsive state, devolving power to local government and renewing our civic institutions of social trust and security. Society needs to reassert itself over the market economy.

Why it may be ok to print money

It is worth reading Samuel Brittan's pice in this morning's FT.

He defends the reflationary tactics of the governemnt even to the point of view of printing more money and his rational

The most frequent objection is to ask: “Where will the money come from?” The short answer is: the Bank of England printing works in Debden. This is not just a debating reply. In a paper currency system there is no fixed pot of money, but a total influenced by human action. The most interesting information in the Bank of England’s Inflation Report is a chart on page 11 showing that the annual growth of broad money and bank credit (excluding certain financial intermediaries) slowed from about 15 per cent early in 2007 to 5 per cent in the third quarter of 2008. In that quarter alone, real money growth (that is, adjusted for inflation) was negative for the first time since the early 1980s. There is clearly scope and need for a pick-up in monetary growth.

Kaletsky pours scorn on the clear blue water

A must read in this morning's Times from Anatole Kaletsky who gives a damming critique of the Tory about turn on economic policy

A few weeks ago it seemed as if Britain - for all its economic problems and the manifest political inadequacy of Gordon Brown - at least had a competent Opposition that would one day form a credible alternative government

However now

Tories have chosen this moment to self-destruct, leaving no plausible alternative to Labour, and nobody, apart from the redoubtable Vince Cable, to challenge Mr Brown's delusions of grandeur - or potential economic misjudgments.

and there is more

This week, Mr Cameron showed that he had forgotten nothing by suddenly reverting to the policies of John Major - not just the “strong sterling” totem, but the whole package, complete with empty promises of fiscal restraint, warnings about a “Labour tax bombshell” and contempt for Keynesian economics. These were policies that Mr Cameron used to advocate when he worked for Norman Lamont. The leader of the Tory “modernisers” was supposed to have forgotten all this nonsense when he left the side of the former Chancellor on Black Wednesday, but he has now reverted to type.

Richards with a word of warning for Cameron and Osborne

Steve Richards has not wasted much time in attacking the change of policy by the Tories.

In his Indy column this morning he writes that

The politics of the recession claims another policy, this time a big one. In announcing that the Conservatives will no longer stick with the Government's planned spending levels, David Cameron makes a move he was once determined to avoid.

As I wrote yesterday this is a risky move by the party and flies in the face of public opinion or at least the perceived public opinion

The Tories had lost two elections on that basis.

he notes

and adds that

Will such slogans work again? They might do. An apparently long-lasting tax cut has more attractions than a temporary one and gives Cameron space to argue that the Government is borrowing recklessly. But there are big risks for the Tories. Most non-partisan economists recognise the case for higher borrowing to pay for a fiscal stimulus. The Conservatives are virtually on their own in claiming spending cuts are an immediate answer. The Liberal Democrats are being more candid and progressive in arguing that taxes on high earners should rise to pay for some of their proposals.

At least we know what to vote for at the next election

Whilst for the sake of politics I applaud the Tory decision to actually have a different policy to Labour on the economy,I do wonder whether they have picked the right subject to display the clear blue water.

Gordon Brown has been quick this afternoon to say that the Conservatives were the only group who didn't agree that a fiscal stimulus was necessary, and adding that their stance was made "for purely dogmatic reasons".

If there is indeed a consensus around the world for fiscal stimulation then George and David are going to start to look pretty stupid.

Listening to the Shadow Chancellor on the World at One,he failed to give a viable argument for the change in tact other than it was different to the Labour policy and gave vague references to the failure of the current administration to repair the roof whilst the Sun was shining.

At least now we will know what we are voting for at the next election

Little room for manoevre

I quite agreed with Nick Robinson's synopsis on David Cameron's response to the financial crisis

On the banking crisis, he can't say "I told you so" because he didn't.
He can't say "we had a better answer" because he didn't propose one and he's given his backing to the Brown plan.On what looks like a looming recession, he won't say "let's cut taxes to stimulate the economy" - as the American and Australian governments have - because he's already declared that "the cupboard is bare" and that as a "fiscal conservative" he's not prepared to borrow to finance tax cuts.
Thus, he's limited to proposing small-scale policy responses - yesterday a VAT holiday for small businesses, today a short-term tax cut for them - or to saying, like the Irishman in the old joke, "I wouldn't have started here".

But on one of the proposals is he actually breaking the law?

Fraser Nelson thinks that he might be

The Sixth EU VAT Directive mandates all states to apply VAT the same way as long as the main rate is a minimum of 15% and the discounted rate at least 5%. Room for manoeuvre was tightened to almost zero two years ago in the EU Recast Sixth Directive. You don’t mess with this, as the Blair government found out when it lost its fight to grant companies the right to reclaim VAT spent on fuel.

Cable has some radical proposals

I am not sure whether Vince Cable is correct in his assertion that the Bank of England's independence should be taken away on a temporary basis whilst we get through the worst of the financial crisis.

Speaking on Andrew Marr this morning in a three some with George Osbourne and Alistair Darling( is this the new face of inter party cooperation?),he felt that desperate times called for desperate measures.

It was interesting that Osbourne was not in agreement.Cable thinks that it must be deflected form its inflationary goal but as Alistair Darling pointed out it also has the remit for supporting the government's economic policy.

Cable reiterates his proposal in the Sunday Times this morning

Leadership will not come from a committee of economic ministers standing behind the chancellor, debating where to steer and fighting for control of the tiller. There has to be a sense of policy direction. Fortunately there are lessons to be learnt from previous financial tsunamis.

He calls for an immediate cut in interest rates of 2 percentage points and on Marr's show said that quarter or half percentage cuts were inadequate.

History teaches us that interest rates should be slashed during a banking crisis to stave off deep recession. This has happened in the United States, but not in Britain. The approach of the Bank of England’s monetary policy committee, dictated by its mandate, is to balance deflationary against inflationary risks with, in practice, occasional small adjustments in interest rates. The committee is in danger of becoming irrelevant in an environment where short and medium-term inflationary risks are massively outweighed by the danger of a once-in-a-lifetime collapse of the financial system

The rabbit is out of the hat

The only surprise then from George Osbourne is the pledge to freeze council tax levels for the next two years.

Yet the rabbit out of the hat over council may well get a reaction similar to the one on inheritance tax which was the turning opint for the conference last year and again it is aimed at the middle England.

The freeze will be funded by cutting spending on government consultants and advertising and is estimated that it could save a typical Band D owner around £210.
Labour sources are saying that the saving could cost up to £2bn

Apart from that very little unexpected in the speech.The usual stuff aboiut Gordon Brown leaving the cupboard bare and a vague commitment to reducing taxes over the life of a Tory Government.

Countering the Brown aspersions that he was too inexperienced,he claimed that he had had enough experience of the Brown economics.

As for the plan for the economic recovery,the party proposes budgetary targets which will balance the commitments of spending against the borrowing levels.The Independent Office for Budget Responsibility will monitor and produce borrowing forecasts and will suggest whether taxes should rise or spending plans be curbed to give a future Tory government the chance of meeting its medium-term goals.

Some instant reaction-Andrew Porter at the Telegraph

First, he struck the right tone for the times. Second, he nailed the lie that he is a friend of greedy bankers. And third, he had a policy that will grab headlines

James Forsyth

This was new, serious George. In a soberly-delivered speech, Osborne went a long way to reassuring voters that he is ready to be Chancellor. He stressed financial and fiscal responsibility and deftly threaded the political needle on criticising the excesses of the City without committing to more regulation. Osborne was so keen to demonstrate his seriousness that he kept his trademark smirk under wraps. He even bit his lip during one bout of applause in a seeming attempt to stop it from breaking through.

How debt will take over the political landscape

A timely leader in the Times this morning,if you will excuse the pun.

As the government is poised to take Bradford and Bingley into public ownership,it argues that The issue of debt will now dominate political debate

It argues on two fronts,firstly that

by getting a poor return on its public spending, the Government has avoidably taken public finances into the red. From its recent low of 29.6 per cent in 2002, debt as a proportion of GDP has risen steadily. In August of this year it stood at 43.3 per cent. This parlous financial position is a direct political legacy. A government of genuine prudence might have put money in the bank at the top of the cycle to pay the bills at the bottom. But it would then have been unable to argue that the Conservative plans to cut taxes would require cuts in public spending. The dividing line of investment versus cuts - on which the Government has fought the last two elections - does not work if there are funds in the bank.

and secondly

an expansion based on excessive household credit has gone predictably awry. At the same time as the public finances have been deteriorating, household debt has been rising. The value of Britain's personal debt - £1.35 trillion - is now greater than the value of its gross domestic product. The main reason, of course, is that a house in Britain is not a home: it is an investment. The ratio of household debt to post-tax income is now three times greater than 25 years ago.

A wry intervention by Davis

The Conservatives have been very quiet on the economic crisis this week,so much so that some are saying that George Osbourn's speech in Birmingham next week could be make or break time.

He won't therefore be very happy with former shadow Home Secretary David Davis' intervention in the Telegraph this morning.
Being interviwed he says that

The Conservative Party has not yet developed the right economic and tax policy to deal with the impact of the worsening global economic situation

and continues

"The public at large are not listening to the left versus right, the big versus small state debate,"
"They're listening for answers to the questions - can I afford my standard of living? Can I keep my job? For the first time in a long time, the answers to these questions might be no, if people get the answers wrong.
"One of the reasons for a serious message from us, is that. They don't want to hear political rhetoric."

With the polls showing at least a short term bounce towards Gordon Brown,the conference will be under intense scrutiny and people will start asking just what Tory policy is.

As if to bear that out this morning's Independent carries a poll of 1800 tOry members by Consevative Home which suggests that

64 per cent want to see bold policies to give voters a clear idea of how the Tories would fix Britain. Only 36 per cent support the more cautious approach favoured by Mr Cameron.

What a week to be away

Last year,the same week I was away and the Northern Rock crisis started.This time,the world's financial system teeters on the brink of collapse.By the end of the week,the United States government is effectively in control of the country's financial assets and Gordon Brown has created a new super bank.(At least we should now see the end of those awful Halifax adverts).

Now we have the Labour party conference starting,just a couple of miles down the road from where I am sitting typing this.

Will Gordon survive? It seems as though the past weeks events have given him a chance to shine,but I wish he would

a) acknowledge that he has made mistakes

b) stop harping back to the early 90's with high inflation,unemployment and interest rates.It past and it is largely irrelevant

c) assemble a decent team around him that care about the individual and are not just career politicians.

Brown rejects short termism

It may not have been what the electorate wanted to hear ,but Gordon Brown's comments at the CBI in Glasgow last night were some of his better pronouncements on the economy.

Rejecting short term gimmicky solutions,in this case one off payments to alleviate the cost of fuel,he said that the solutions were long term by way of reducing our consumption of fossil fuels.

“Not short-term gimmicks or giveaways - but firm steps towards making every home in Britain more energy efficient, thus reducing bills not just temporarily, but permanently.
“Because you cannot address a long term problem - the supply and demand for oil- with a short term gimmick like a fuel duty stabiliser.”

No doubt also a sideways swipe at the Tories fuel duty stabiliser.Is this the first steps to realising that the market price can influence our fuel consumption?
Yesterday's figures on new car sales,despite the slump in sales showed that we are downsizing on our petrol consumption by shunning the 4*4 and other uneconomical vehicles.